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Dividends create an immediately taxable event, the value gained in a stock buyback is only taxed when the stock is sold. It’s one contributor to the low amount

Dividends create an immediately taxable event, the value gained in a stock buyback is only taxed when the stock is sold. It’s one contributor to the low amount of taxes paid by the so-called 1%.

627467 4y ago
Isn't stock sold in the event of a buyback? And isn't that event taxable? Are dividend taxes higher than capital gains from stock sale taxes?
- realityking 4y ago
  Depends. Only if the sellers make a profit with the sale. Then that profit is taxed. The value gained by the other shareholders is not taxed until they sell themselves.
s1artibartfast 4y ago
Of course unrealized gains won't be taxable, but they can't be spent either. For me, it makes a lot more sense to tax realized profit, or better yet consumption, than wealth itself. I don't think it is desirable to force realization just to increase tax revenue.
- bialpio 4y ago
  My understanding is that you can play tricks with stocks so that you don't really need to realize the gains to benefit from them. They can be used as collateral for loans, directly donated to charities (lowers down your tax bill w/o forcing you to realize the gain), there's also the step-up basis loophole (or was it already closed?). I may be missing some details (and other creative ways to do "tax optimization") though, I'm not a CPA.
  - lesam 4y ago
    I never see anyone complaining about buybacks because of tax reasons though. In particular, the author is complaining companies are not spending enough on R&D because of buybacks. It is true that buybacks are more tax efficient than dividends, which is why companies generally do buybacks instead of dividends. The US tax on capital gains is definitely a mess though.
    - bialpio 4y ago
      I was mostly responding to the "but they can't be spent either" part. From my perspective there isn't that much difference if a company is doing a buyback vs a dividend, as long as it's sharing its profits with the investors (w/o that, I view the stock market as a legal Ponzi scheme); I'm not really commenting on how much money should transfer to the shareholders though.
  - s1artibartfast 4y ago
    I had not heard about the donating to charity. Very interesting and tax efficient, but worth noting that you cant make money with it (you are still donating far more than you are saving in taxes).
    - toss892625 4y ago
      In high-tax states, where Federal + State taxes exceed 50%, it is now possible (but rare!) to 'make money' by donating. Let's take someone with a 53% marginal income tax, living in NYC. The person has stock with a basis of $0.0 with a current value of $10, and has held the stock for less than a year (short term capital gains = ordinary income rates). Separately, they have $1,000,000 of income. Scenario 1) Donating the stock would produce a $10 tax deduction, worth $5.3. Scenario 2) Selling the stock would produce $10 of returns - $5.3 in income tax = $4.7 In this scenario, donating the stock produces higher returns compared selling the stock. It's a fairly obtuse scenario, since it's rare for the cost-basis to be so low, time-span to be so short, and to have a good use for a tax deduction. It becomes much more likely when a completely illiquid & price inflated stock is donated. If a large chunk of illiquid stock is sold, it'll crash. But donating an inflated chunk of stock would lock in the tax deduction. Donating shares of a stock when a person knows insider information is called 'insider giving', and is highly prevalent & largely unenforced. https://dlj.law.duke.edu/article/insider-giving-avci-vol71-iss3/ https://dlj.law.duke.edu/article/insider-giving-avci-vol71-i....
    - Qwertious 4y ago
      Charities aren't necessarily "charitable" - they can be political and affect businesses. And in the dodgiest situations, they can be something you financially benefit from. Obviously the latter leans towards tax evasion, but that's exactly the point - stock buybacks aren't necessarily tax evasion but they can certainly assist in it.
    - bialpio 4y ago
      Just set up your own charity that pays for your charity-related travel - it's not your fault that the charity focuses on work in a region where you happen to have a summer home. ;- )
- FooBarWidget 4y ago
  > For me, it makes a lot more sense to tax realized profit, or better yet consumption, than wealth itself. Why not tax all of that simultaneously? That's what the Dutch do. > I don't think it is desirable to force realization just to increase tax revenue. And yet various governments are doing or are planning exactly that.
  - s1artibartfast 4y ago
    I searched and couldnt find anything about a Dutch wealth tax, just answers saying they dont have one. Do you have a source? I wasn't aware of any western countries which have wealth taxes, but I was surprised to find that Norway, Spain, and Switzerland do have some. https://taxfoundation.org/net-wealth-tax-europe-2022/#:~:text=The%20concept%20of%20a%20net,Norway%2C%20Spain%2C%20and%20Switzerland https://taxfoundation.org/net-wealth-tax-europe-2022/#:~:tex....
    - em500 4y ago
      Straight from the source: https://www.belastingdienst.nl/wps/wcm/connect/en/income-in-box-3/income-in-box-3 https://www.belastingdienst.nl/wps/wcm/connect/en/income-in-... Summary: https://en.wikipedia.org/wiki/Taxation_in_the_Netherlands#Box_3:_savings_and_investment https://en.wikipedia.org/wiki/Taxation_in_the_Netherlands#Bo...
      - s1artibartfast 4y ago
        This looks like capital gains to me. Taxation on income from wealth, not wealth itself. https://www.belastingdienst.nl/wps/wcm/connect/en/income-in-box-3/content/what-does-the-ruling-of-the-supreme-court-mean https://www.belastingdienst.nl/wps/wcm/connect/en/income-in-...
        erwincoumans 4y ago
        No, they use hypothetical yield (of over 5%). It applies to savings accounts, that had negative interest rates... See my reply above.
- arrosenberg 4y ago
  > Of course unrealized gains won't be taxable, but they can't be spent either. They can be spent if you have a low interest LOC at a bank backed by your assets like stocks.
  - s1artibartfast 4y ago
    Don't get me wrong, unrealized gains are a useful and great thing to have. I would rather have them over nothing any day. However, you can't get that off your books without realizing gain at some point. It pushes tax burden into the future, but doesn't eliminate it
    - arrosenberg 4y ago
      If you have enough money you can push it into the future more or less indefinitely.
      - mindslight 4y ago
        Until you die. At which point your heirs get a "stepped up basis" to the date of your death without paying any capital gains tax, under the theory that they pay estate tax instead. But estate tax starts at $10M or so these days. And don't worry if you have more money than that - you've got enough breathing room to create irrevocable trusts to skip estate tax and distribute income directly to your low tax bracket decedents in perpetuity. For an example of how much the IRS theoretically cares about not being able to kick income down the road - basically the entirety of retirement savings regulations revolve around the controlled ability to do just that.
deleted 4y ago
[deleted]

Dividends create an immediately taxable event, the value gained in a stock buyback is only taxed when the stock is sold. It’s one contributor to the low amount of taxes paid by the so-called 1%.

627467 4y ago

Isn't stock sold in the event of a buyback? And isn't that event taxable? Are dividend taxes higher than capital gains from stock sale taxes?

realityking 4y ago
Depends. Only if the sellers make a profit with the sale. Then that profit is taxed. The value gained by the other shareholders is not taxed until they sell themselves.

s1artibartfast 4y ago

Of course unrealized gains won't be taxable, but they can't be spent either. For me, it makes a lot more sense to tax realized profit, or better yet consumption, than wealth itself. I don't think it is desirable to force realization just to increase tax revenue.

bialpio 4y ago
My understanding is that you can play tricks with stocks so that you don't really need to realize the gains to benefit from them. They can be used as collateral for loans, directly donated to charities (lowers down your tax bill w/o forcing you to realize the gain), there's also the step-up basis loophole (or was it already closed?). I may be missing some details (and other creative ways to do "tax optimization") though, I'm not a CPA.
- lesam 4y ago
  I never see anyone complaining about buybacks because of tax reasons though. In particular, the author is complaining companies are not spending enough on R&D because of buybacks. It is true that buybacks are more tax efficient than dividends, which is why companies generally do buybacks instead of dividends. The US tax on capital gains is definitely a mess though.
  - bialpio 4y ago
    I was mostly responding to the "but they can't be spent either" part. From my perspective there isn't that much difference if a company is doing a buyback vs a dividend, as long as it's sharing its profits with the investors (w/o that, I view the stock market as a legal Ponzi scheme); I'm not really commenting on how much money should transfer to the shareholders though.
- s1artibartfast 4y ago
  I had not heard about the donating to charity. Very interesting and tax efficient, but worth noting that you cant make money with it (you are still donating far more than you are saving in taxes).
  - toss892625 4y ago
    In high-tax states, where Federal + State taxes exceed 50%, it is now possible (but rare!) to 'make money' by donating. Let's take someone with a 53% marginal income tax, living in NYC. The person has stock with a basis of $0.0 with a current value of $10, and has held the stock for less than a year (short term capital gains = ordinary income rates). Separately, they have $1,000,000 of income. Scenario 1) Donating the stock would produce a $10 tax deduction, worth $5.3. Scenario 2) Selling the stock would produce $10 of returns - $5.3 in income tax = $4.7 In this scenario, donating the stock produces higher returns compared selling the stock. It's a fairly obtuse scenario, since it's rare for the cost-basis to be so low, time-span to be so short, and to have a good use for a tax deduction. It becomes much more likely when a completely illiquid & price inflated stock is donated. If a large chunk of illiquid stock is sold, it'll crash. But donating an inflated chunk of stock would lock in the tax deduction. Donating shares of a stock when a person knows insider information is called 'insider giving', and is highly prevalent & largely unenforced. https://dlj.law.duke.edu/article/insider-giving-avci-vol71-iss3/ https://dlj.law.duke.edu/article/insider-giving-avci-vol71-i....
  - Qwertious 4y ago
    Charities aren't necessarily "charitable" - they can be political and affect businesses. And in the dodgiest situations, they can be something you financially benefit from. Obviously the latter leans towards tax evasion, but that's exactly the point - stock buybacks aren't necessarily tax evasion but they can certainly assist in it.
  - bialpio 4y ago
    Just set up your own charity that pays for your charity-related travel - it's not your fault that the charity focuses on work in a region where you happen to have a summer home. ;- )
FooBarWidget 4y ago
> For me, it makes a lot more sense to tax realized profit, or better yet consumption, than wealth itself. Why not tax all of that simultaneously? That's what the Dutch do. > I don't think it is desirable to force realization just to increase tax revenue. And yet various governments are doing or are planning exactly that.
- s1artibartfast 4y ago
  I searched and couldnt find anything about a Dutch wealth tax, just answers saying they dont have one. Do you have a source? I wasn't aware of any western countries which have wealth taxes, but I was surprised to find that Norway, Spain, and Switzerland do have some. https://taxfoundation.org/net-wealth-tax-europe-2022/#:~:text=The%20concept%20of%20a%20net,Norway%2C%20Spain%2C%20and%20Switzerland https://taxfoundation.org/net-wealth-tax-europe-2022/#:~:tex....
  - em500 4y ago
    Straight from the source: https://www.belastingdienst.nl/wps/wcm/connect/en/income-in-box-3/income-in-box-3 https://www.belastingdienst.nl/wps/wcm/connect/en/income-in-... Summary: https://en.wikipedia.org/wiki/Taxation_in_the_Netherlands#Box_3:_savings_and_investment https://en.wikipedia.org/wiki/Taxation_in_the_Netherlands#Bo...
    - s1artibartfast 4y ago
      This looks like capital gains to me. Taxation on income from wealth, not wealth itself. https://www.belastingdienst.nl/wps/wcm/connect/en/income-in-box-3/content/what-does-the-ruling-of-the-supreme-court-mean https://www.belastingdienst.nl/wps/wcm/connect/en/income-in-...
      - erwincoumans 4y ago
        No, they use hypothetical yield (of over 5%). It applies to savings accounts, that had negative interest rates... See my reply above.
arrosenberg 4y ago
> Of course unrealized gains won't be taxable, but they can't be spent either. They can be spent if you have a low interest LOC at a bank backed by your assets like stocks.
- s1artibartfast 4y ago
  Don't get me wrong, unrealized gains are a useful and great thing to have. I would rather have them over nothing any day. However, you can't get that off your books without realizing gain at some point. It pushes tax burden into the future, but doesn't eliminate it
  - arrosenberg 4y ago
    If you have enough money you can push it into the future more or less indefinitely.
    - mindslight 4y ago
      Until you die. At which point your heirs get a "stepped up basis" to the date of your death without paying any capital gains tax, under the theory that they pay estate tax instead. But estate tax starts at $10M or so these days. And don't worry if you have more money than that - you've got enough breathing room to create irrevocable trusts to skip estate tax and distribute income directly to your low tax bracket decedents in perpetuity. For an example of how much the IRS theoretically cares about not being able to kick income down the road - basically the entirety of retirement savings regulations revolve around the controlled ability to do just that.

deleted 4y ago

[deleted]